Forming an LLC: What Business Owners Need to Know

Whether you’re starting a new company or have been at it for a while, selecting a limited liability company (LLC) as your business structure could be a smart move. LLCs combine a corporation’s liability protection with a sole proprietorship’s operational flexibility. Plus, they come with excellent tax benefits.

However, forming an LLC can be deceptively complicated. The steps are easy to follow, but to ensure you’re fully protected, you should hire a business attorney to draft the paperwork on your behalf.

Before we get there, let’s break down what an LLC is and if it’s the right business structure for you.

Understanding LLCs

LLC managers and members enjoy many key benefits other business structures offer. LLCs provide limited liability protection, so if your business goes into debt or you get sued, you typically won’t risk losing your personal assets, like your house or car. They also let you choose from numerous ownership arrangements and decision-making processes, so you’re not as constricted as you would be if you were running a corporation. 

LLCs don’t have an official tax designation and can be taxed as sole proprietorships, partnerships, S corporations, or C corporations. 

Forming an LLC

Here’s the step-by-step process of forming an LLC:

1. Getting Your Business Name

Once you decide on your organization’s name, conduct a business entity search on your state’s government website. Since you’re forming an LLC, you must include Limited Liability Company, LLC, or another accepted version of this in your name. 

If your desired business name is available, you can reserve it for $30 ($20 if you’re a nonprofit organization) while you get the rest of your paperwork in order. You can also register a Doing Business As (DBA) name for $5. 

2. Select Your Registered Agent

A registered agent is whoever will receive your LLC’s legal and financial documentation. They can be a person or business entity, but they must have a physical address in the state where you’re forming your LLC. Having a P.O. Box in the state alone won’t be enough. 

You can be your own registered agent, but be aware that your registered agent’s address becomes public knowledge after you form your LLC. If you’re concerned about sharing your personal information with the world, you can use a commercial registered agent service instead. 

3. File Your Articles of Organization

The Articles of Organization are the legal documents you must file with the Secretary of State when forming your LLC. They may sound intimidating, but most of the information required is pretty straightforward, including items such as:

• Your organization’s name and address
• Your registered agent’s name and address
• The names and contact information of your LLC’s organizer and officers 
• Your annual report contact information 
• Your organizer’s name and signature

4. Draft Your Operation Agreement

An operating agreement is like your organization’s constitution. Washington State businesses aren’t required to have an operating agreement because this agreement may be verbal or implied. However, creating one is strongly recommended — even if you’re the only member of your LLC. 

Your operating agreement outlines your LLC’s rules, regulations, and liabilities. If your LLC ever encounters a legal or financial dispute, this document can help resolve it. Without it, the courts may make critical decisions for you, and a judge’s ruling might not be in your or your LLC’s best interests. 

An operating agreement answers vital questions like:

• What are your liability clauses?
• How are profits and losses divided?
• Who has voting rights?
• What are members’ powers and responsibilities?
• How are new members inducted?

Operating agreements also outline a plan for dissolving the LLC. It never hurts to have a plan in case the business goes under, or you and your members decide on a new venture. 

5. Pay Your Annual Fees

After forming an LLC, you must remain in good standing by filing your annual report, which is similar to your Articles of Organization. In many cases, all you have to do is verify that your contact information is up to date and pay the annual fee. However, you may be required to inform shareholders and other interested parties about your company’s activities during the year in question and provide details about your LLC’s performance. 

6. Additional Items to Consider

In addition to everything mentioned above, certain occupations and municipalities may require specific permits, licenses, and registration forms. Check your local government website to figure out what you need. 

If your LLC offers a taxable service or retail component, you’ll also need a Sales and Use Tax Permit. 

Benefits of Forming an LLC

LLCs come with numerous perks. Here are a few:

Limited Personal Liability

We can’t stress enough how important this is. Properly drafted LLCs legally separate you and your business so that your organization’s debts don’t become yours. If you get sued or file bankruptcy, your personal assets are protected. 

Tax Advantages

Single-member LLCs (SMLLCs) are designated as a disregarded entity. Simply put, the IRS “disregards” the organization’s separate existence, so you report your business’s income and expenses on your personal tax return, much like a sole proprietor. 

LLCs with two or more members can choose pass-through taxation or corporate taxation. Pass-through taxation prevents you from paying taxes twice — once on your LLC’s profits and again on the profits you receive as an individual member. Corporate taxation can reduce your overall tax liability depending on your LLC’s income level and other factors.

Operational Flexibility

LLCs can be “member-managed” or “manager-managed,” meaning that the members can run it themselves or hire a manager to handle daily operations. These designations give some members the option to be less involved than others. 

LLCs aren’t bound by strict profit distribution requirements. While corporations distribute profits according to the number and types of shares shareholders hold, LLCs can select a distribution structure that works best for them. For example, if one member does twice the work of the other, they can opt for a two-to-one split. 

Also, record-keeping requirements are less strict for LLCs than for corporations, making it easier for you to focus on your business’s objectives. 

Drawbacks of Forming an LLC

The pros of LLCs usually outweigh the cons, but here are a few you should be aware of:

LLC Dissolution

In theory, corporations can exist forever. However, an LLC may be dissolved if a member files for bankruptcy or passes away. In Washington State, your LLC’s operating agreement usually determines what happens under these circumstances. If it’s not clearly addressed, state law governs. 

Risk of Misunderstandings

If your operating agreement fails to outline member roles and responsibilities clearly, there’s potential for confusion later. The end result can be a nightmare for organizations, especially when there’s a lack of transparency around items such as capital contribution requirements and profit distribution agreements. 

Incorrect Taxation

Regarding taxes, LLCs can select which business structure works best for them. However, you can also select a structure that requires you to pay more than you should. Consult a business attorney or tax professional to determine which structure you should opt for based on your situation. 

LLCs vs Sole Proprietors

Who Should Form an LLC?

Every organization is different, and while LLCs are excellent options for many businesses, there may be better options for you. Here are a few of the many scenarios where you’ll typically benefit from forming an LLC:

• Entrepreneurs, freelancers, and consultants: LLCs let you separate your business and personal assets if someone gets hurt or sues your organization. 
• Startup owners: LLCs provide startups with the operational flexibility they need as they expand and grow. In some cases, it’s advantageous to restructure into an S corp, but until you reach that bridge, forming an LLC is typically the way to go. 
• Rental property owners: Like startups, rental property owners often benefit from the ability to expand and grow as an LLC. However, remember that you’ll also require other safeguards, like rental property insurance. 

Hiring a Business Law Expert When Forming an LLC

Forming an LLC can be one of the best business decisions you ever make, so long as your business contracts are legally sound. 

At Exordium Law, we’re here to guide you through every phase of business growth while providing you with the legal guidance you need to thrive. Don’t wait until it’s too late to resolve a member dispute. Address problems before they become problems by partnering with an expert who knows the law. Let’s work together to build a solid legal foundation for your business.